“Retenciones,” Argentina’s Agricultural Production and World Food Markets

Export taxes (‘retenciones”) have been criticized inside and outside Argentina for its potential negative impact on incentives for agricultural production, which would negate growth opportunities for the country and would have contributed to the global food crisis.

Here I am not going to focus on the current situation, which, I think most of us hope, will have an institutional solution in the Argentine Congress, where the issue is being discussed now. I will rather look at two broader issues: a) how relative domestic agricultural prices changed during the period of export taxes (2003-2007), and b) how Argentina’s agricultural production and exports have performed during this period.

Regarding incentives, the main point to be noticed is that the impact of the “retenciones” cannot be analyzed separately from, but have to be viewed in conjunction with, other policy measures, particularly the exchange rate. The next Chart shows three variables, all normalized to 1 by the first quarter of 2001:

a) the index of domestic relative prices between agriculture and total goods and services (this ratio is a traditional indicator of the incentives for agricultural production and it is measured as the ratio of the deflator of the agricultural value added in GDP at factor costs, to the total GDP deflator at factor costs; it should be noted that value added is calculated at producer prices, and therefore it includes the impact of the export taxes);

b) the index of real prices for world agricultural prices (the weighted average of IMF indices for “Food,” “Beverages” and “Agricultural Raw Materials,” using IMF weights; it is then deflated by the US Consumer Price Index); and

The series go from the first quarter of 1996 to the first quarter of 2008 (the last data available for national accounts).

It is obvious from the Chart that there has been a significant improvement in the internal terms of trade for agriculture since 2002/2003 and that such improvement was the result, not of changes in world prices, but of the adjustment in the exchange rate (a policy decision aimed at reverting the clearly appreciated domestic currency that prevailed during the Convertibility program). Domestic agricultural relative prices follow basically the real exchange rate and are less affected by international prices, at least until late 2007 and early 2008 where the influence of increasing world prices reinforces the impact of the adjustment of the exchange rate. This behavior of relative prices is different from the period before 2002 (when the Convertibility Plan maintained a fixed 1 peso=1 US$ exchange rate), in which internal terms of trade for agriculture basically followed real international prices downwards. Note also that adjusted for inflation (using the US CPI) current world agricultural prices (in the aggregate) are at about the same level of 1996/1997, which was also a period with negative weather conditions linked, like now, to strong El Nino/La Nina events. This has to be kept in mind when sectoral and overall growth in Argentina is attributed mainly to “external tail winds.” Additionally, there were other policies that also benefitted agriculture, such as solution of debt problems for many producers affected by the 2001-2002 macroeconomic collapse and expansion of investments in technology and infrastructure. The combination of all those policies contributed to the strong supply-side response, as it is shown immediately.

The next Chart shows total production of grains and oilseeds. It is clear that since 2003 production in volume has jumped significantly above trend (which has also been accelerating).

In fact, compared to the (exponential) trend Argentina’s production of grains and oilseeds during 2003-2007 has been about 10% annually above that trend, for an accumulated of almost 40 million of MT of excess production during that period that would not have been available had Argentina stayed on trend. Such jump in supply was the producers’ response to the significant shift in policy-induced incentives. The next Tables present a more disaggregated view for a series of products: grains, oilseeds and byproducts, and beef (I also prepared Tables for corn, wheat, rice, poultry and cheese, in case anyone is interested).

Each table includes the following five variables a) production; b) exports (both in thousands of metric tons); c) Argentina’s production over world production; d) Argentina’s exports over world exports; and e) Argentina’s exports over Argentina’s production (the last three variables in percentages). The first two variables simply show Argentina’s contribution in volume to global supplies, both production and exports (Argentina’s imports of those products are negligible). The second two indicators help to determine whether Argentina may be lagging or not the rest of the world in production or exports (which, as some claim, would be the result of export taxes). The final indicator tries to show whether Argentina may be prioritizing the domestic market (for instance if the ratio of exports to production declines). The main comparison is between the period 2003-2007 and the 1990s. The period of the crisis 1999-2002 is also included as a reference because, usually, food exports tend to expand during economic crises mainly due to declines in domestic consumption. The data comes from the PSD database of the USDA. Data for 2008 is still preliminary, and has not been included.

It is clear that the physical volume of production and exports increased noticeably during the period 2003-2007 across all products, when compared to the 1990s or with the crisis 1999-2002. However, someone could argue (ignoring the Chart with relative prices shown initially) that such performance is simply the result of the effect of better world agricultural prices, which benefited Argentina, but that our country, because of export taxes and other policies, did not have a supply response as strong as the rest of the world. The next two variables, which show Argentina’s production and exports as percentage of the respective world values, clearly refute this view: in general not only the volumes of production and exports increased in 2003-2007 but the participation of Argentina compared to the rest of the world also went up. In other words, Argentina’s agriculture reacted more strongly to the existing incentives provided by world prices than the agriculture of the rest of the world. If the main reason for Argentina’s increases in production were world prices, but this incentive effect was muted by export taxes, as some argue, Argentina should have decreased its global participation, and not increase it, as it happened. This last effect is in line with the strong shift in domestic incentives shown in the first Chart as a result of normalizing the real exchange rate to Argentina’s historical levels of 1975-1990. After then the Convertibility program engineered the deepest and more sustained overvaluation of the Argentine currency, which was supported by ever-increasing external debt.

Finally, the last variable shows that Argentina, on average and for most products, has been sharing with the rest of the world a larger percentage of production, although there has been some rebalance in the last two years for animal products, but still with an export orientation that is stronger than in the past.

In summary, during the period 2003-2007 Argentina has contributed more than in the past to global food supply, both in absolute volumes and relatively to the rest of the world, helping improve world nutrition conditions, at least from the point of view of global availability of calories and proteins. Had Argentina not experienced such strong supply response over the last years, the current tight conditions in many food markets would have been far worse.

6 Responses to "“Retenciones,” Argentina’s Agricultural Production and World Food Markets"

Roman July 3, 2008 at 11:16 am

Eugenio,This is a good post. But if things are going so wonderfully in Argentina and statistics look so good, why does the government lies/manipulates inflation figures? According to data in the cite http://www.inflacionverdadera.com, inflation is three times higher than official figures. What other statistics does the government manipulate? So the question is how credible are your numbers then (which are based on official data) if the latter are manipulated to embellish these numbers. Sorry, but data based on Argentina’s official statistics are not worth a serious analysis like yours.Thanks,Roman

E. Diaz-Bonilla July 3, 2008 at 12:16 pm

Dear RomanYou may or may not want to believe data produced by the Argentine government, but all data on production and exports is from the US Departament of Agriculture (the PSD database). It is clear in the blog what the sources are.The debate about inflation statistics is irrelevantt for the production and export charts and table, and would have some bearing only on the last two or three observations of the REER index. Even adjusting those observatoins with other estimates of inflation, the key points of the blog remain.Also I did not say things are going wonderfully in Argentina.Thanks for your comments

Guest July 3, 2008 at 1:19 pm

Has the drought reduced production and exports this year?

RL July 4, 2008 at 4:29 am

Your excellent post has brought some pessimistic thoughts to my mind. If the devaluation had a greater impact on production and exports than agricultural prices, then the current process of real appreciation due to high inflation is also having a huge impact. Maybe inflation is the reason that makes the sector so fiercely opposed to the taxes.Your REER index is not based on official CPI figures?I assume it is. If we used private estimates for inflation the REER curve is more or less where it was in 2001.RL

RL July 4, 2008 at 4:52 am

…Also you used a broad index of agricultural prices while Argentina has benefited mainly of high prices for cereals and soya. The prices of these commodities have increased way much than the general index for food.Shouldn’t we consider the benefits of devaluation to be the main cause for increased export and production in the period 2003/05, while from 2005/06 forward look upon high agricultural prices? … although now increasingly offset by inflation.RL

E. Diaz Bonilla July 21, 2008 at 10:40 am

I apologize to guest and RL for not answering before. I was traveling and wanted to check one of the points made by RL (that with non-official inflation the ER is back to 2001). This is not the case: even if you assume 20% inflation for 2007 and 30% for 2008 (clearly above most of the private estimates going around), the REER (deflated by the US CPI) is still about 1.6 in Q1 2008 against 1 in Q1 2001. As a reference, with official estimates of inflation the REER is 1.84 in Q1 2008. Going to the question by guest: There are localized drought problems, affecting some productions, but so far it does not seem to have had a large impact on main crops. Regarding the points made by RL I reproduce them and give my answerRL"If the devaluation had a greater impact on production and exports than agricultural prices, then the current process of real appreciation due to high inflation is also having a huge impact. Maybe inflation is the reason that makes the sector so fiercely opposed to the taxes."EDB: As mentioned above even with non-official estimates of inflation, the REER in Q1 2008 was still way above the 2001 levels. What is a problem is the large increase in fertilizers. Calculating the ratio of prices of fertilizers to prices of main crops (wheat, corn, and soybean), they are igh by historical standardsRL. "Your REER index is not based on official CPI figures?I assume it is. If we used private estimates for inflation the REER curve is more or less where it was in 2001."EDB: I answered that above. RL: "Also you used a broad index of agricultural prices while Argentina has benefited mainly of high prices for cereals and soya. The prices of these commodities have increased way much than the general index for food."EDB: Argentina has a diversified agricultural economy, although the exports may be more concentrated in a number of products. However, being tradables, all agricultural products are influenced by world prices, and therefore, I believe it is correct to use the IMF indices. RL. "Shouldn’t we consider the benefits of devaluation to be the main cause for increased export and production in the period 2003/05, while from 2005/06 forward look upon high agricultural prices? … although now increasingly offset by inflation."EDB. I agree that there some differences across periods. But to me international prices begin to dominate the behavior of the domestic TOT for agriculture only since mid 2007, not before. Also the big jump in the domestic TOT for agriculture from the low plateau of the 1990s to the higher level of the 2000s is cleaarly determined by the change in the REER.Thanks for your comments and, again, I apologize for being so late in aswering.